March 24, 2008
The market has been volatile of late, but it’s beginning to look like the panic brought on by Bear Stearns two weeks ago may mark a sustainable bottom. There are still plenty of crosscurrents (commodity stocks are all over the map), but we’re seeing more bullish action from a variety of stocks and sectors.
Last week we opined that the headlines filled with bad news about Bear Stearns had the potential to mark a major low in the market’s bear phase. And this week, we’re more optimistic that’s the case – hence the Market Monitor above, which has shifted to neutral. Of course, the market is always a challenge, and last week brought rotation out of many commodity stocks, and into some other groups, such as financials and retail. In our view, the commodity stocks are a mixed bag (some are still fine, others, not so much), but the overall market action is encouraging, so you should be looking to put some—but not all—of your sidelined cash to work. This week’s list contains a mix of growth stocks, turnaround stories and some familiar faces; a few have broken out of good-looking basing patterns over the past few days. Our favorite of the week is Kirby (KEX), a shipping company that has staged an extremely powerful breakout in recent days, thanks to a great earnings report.
Why the Strength
Oriental Financial is a small banking outfit that operates in Puerto Rico. Given the world’s current financial mess, you’d think such a small fry would be getting crushed, but in fact, it’s just the opposite– earnings are growing at triple-digit rates while sales surged in the fourth quarter. Why? Interestingly, the business improvement is because of deft management; income from loans has been declining, but income from investments betting on a steepening yield curve is soaring. Management gave itself a pat on the back as it avoided the “excessively aggressive interest rates and other terms offered by other banks” during the boom times. Looking ahead, analysts are looking for nearly $2 per share in earnings for ’08, and as the mortgage industry comes off its knees, Oriental’s exclusive deal with Primerica (a Citigroup subsidiary) for mortgage loans in Puerto Rico, as well as its focus on financial services (IRAs, 401(k)s and services for high net worth clients) should help.
OFG fell from around 30 in 2004 all the way to 8 last September, as the downturn in the financial industry gained steam. But as it became clear that this company wasn’t exposed to the mortgage mess, investors began to accumulate shares. Over the past few weeks, OFG has been a rocket, soaring about ten points on big, increasing volume. Trading volume is still relatively light (under 500,000 shares per day), so volatility is going to be extreme—don’t put the rent money in this stock! But the story and chart are intriguing enough to buy a little on weakness.
OFG Weekly Chart
OFG Daily Chart
Why the Strength
Perrigo specializes in generic drugs, or, as the company prefers to call them, “store brand” products. As the world’s largest store brand manufacturer, Perrigo makes both over-the-counter and prescription drugs, as well as supplying the active pharmaceutical ingredients to many name-brand drug makers. Perrigo has a fascinating history, dating back to 1887, including its role as the developer of private label packaging back in the 1920s. Growth has been both organic and through acquisition, with the 2005 takeover of Agis Industries making a huge addition to Perrigo’s product roster. As with many stocks in this issue of Top Ten, Perrigo isn’t a classic growth company or in a classic growth industry. But new RP peaks indicate market leadership, no matter where they occur, and Perrigo is definitely worth a look.
When PRGO first appeared here back on February 11, we said to watch for a breakout above 37 on good volume, and that’s exactly what has happened. What hasn’t happened is the new market uptrend that we also called for to confirm a buy signal. We think you can buy a little PRGO on any dip back toward its old resistance level at 36. Any dip on volume below 32 would constitute a warning signal.
PRGO Weekly Chart
PRGO Daily Chart
Why the Strength
Tupperware is a very familiar company, but it’s never qualified for Top Ten before. The familiar plastic food storage containers and the company’s once-revolutionary “Tupperware Party” marketing system have made the company a long-term success, but not a ball of fire. Sales growth stagnated for years, actually turning slightly negative in 1999, and staying in single digits in percentage terms until 2006, when a strong sales push into emerging markets got things moving again. Latin America is now a key growth area, with a diversification into beauty products providing the sales leadership the company has needed. A strong Q4 earnings report on January 30 combined with hopeful earnings guidance to give the stock a huge boost. Tupperware consistently enjoys support from between 100 and 200 institutional investors and pays a 2.4% annual dividend. It looks like a good stock for unsettled times.
TUP had a rough year after running into stubborn resistance at 25 back in July 2005. Twelve months later the stock was down at 17. But revived earnings growth got things moving again, and TUP more than doubled in a little over a year. After correcting sharply with the market in late 2007 and finding support at 26, the stock roared back on the strength of good quarterly results. After trading in a tight sideways range for more than a month, TUP may be ready to get back on track. You can buy a little here, and add a little more on a breakout above 39. Conversely, any drop below 34-35 should have you stepping away.
TUP Weekly Chart
TUP Daily Chart
Why the Strength
Retail stocks are gaining strength (even behemoth Wal-Mart is acting well), and Urban Outfitters looks like the #1 stock in the group, based on accelerating sales and earnings growth, hefty margins for a retailer (15.5% pre-tax last year) and bullish trends from its newer stores. The company’s namesake chain, which focuses on 18-30 year olds, saw fourth quarter sales increase 21%, which is great. But its Anthropologie stores, which cater to middle-aged women, grew its sales by 32%, and its direct-to-consumer and wholesale businesses saw sales jump 35% to 40%. All told, the namesake stores make up less than half of sales, so you can see that the company is getting plenty of bang from the growth at its newer stores. Management has always been aggressive, and it expects to boost the overall store count by nearly 50, or about 19%, this year. It’s not changing the world, but it seems as though Urban Outfitters is on the right side of fashion trends.
URBN has shown tremendous resilience during the past couple of months, as the market and most retail stocks have been taken out and shot. Most encouragingly, the stock has traded in a relatively tight pattern the past six weeks, and this morning broke above resistance in the 31 1/2 range. And we’d note that a few of the top growth mutual funds own shares, a positive sign. Like many of this week’s stocks, we can’t say URBN is likely to be a shooting star, but the chart pattern and growth numbers are solid. You can buy a little here, while using the 29 level as a logical stop-loss.
URBN Weekly Chart
URBN Daily Chart
Why the Strength
Cimarex is a mid-sized oil and gas company, with operations centered in Texas, Oklahoma and New Mexico, and the main reason for its stock’s strength is familiar–soaring oil and gas prices. In fact, the average realized price in the company’s fourth quarter was up 58% for oil and 24% for gas. That this rate of growth will continue is, of course, highly unlikely. But Cimarex takes pains to explain that management deserves shareholders’ respect because of its canny approach to exploration and development; the company bases each drilling decision on a risk-adjusted discounted cash-flow analysis, and it maintains a strong balance sheet. Furthermore, it pays a small dividend, bringing shareholders 0.5% per year. Interestingly, the stock still looks like a bargain by many measures. Its current price/earnings ratio is 12, a number dwarfed by the latest earnings growth rate of 117%. Its forward price/earnings ratio is just 10. And analysts’ earnings estimates have recently been raised. Conclusion: there’s significant upside potential in the stock.
XEC traces its roots to 1920, but it didn’t come public until late 2002 … at 13. From there, the stock ran up to 47 at the end of 2005, and then spent two years digesting that gain, as earnings slumped in 2007. The surprisingly good mid-February earnings report sparked buying that shot the stock up to a new high; it got as high as 54. Now the stock has pulled back to its 25-day moving average at 52. The 50-day is down at 47, and if the stock gets that low, you should jump on it. Less risk-averse investors can buy here.
XEC Weekly Chart
XEC Daily Chart
Why the Strength
CSX is strong these days for two main reasons. First and foremost, the company has shaken off its image as an old, cyclical, stodgy railroad and taken full advantage of technology to dramatically boost efficiency, cut costs and lift the bottom line. Earnings have grown each of the past three years, and just last Monday, management boosted guidance for 2008; it now expects earnings to jump 25% this year, which could be conservative, given that fourth-quarter results of $0.85 a share crushed estimates by 20 cents. The second reason for the strength: Transportation stocks are under strong accumulation, as investors anticipate that the recent Fed rate cuts and liquidity moves will get the economy back on track. The Dow Transportation Average, for instance, hit a new 2008 peak today. Is CSX an institutional leader that will race up the charts? Probably not. But given its accelerating earnings growth (see table below) and recently upped views, we believe the stock will see higher prices.
CSX topped out last July, and has been forming a basing structure ever since. It carved out a tight-looking bottom from September through January (importantly, the stock held up well during the mayhem first three weeks of ’08), rallied for a few weeks, and then paused just south of 50. Last week’s good tidings resulted in a big-volume breakout, which should work out well if the market’s worst days are behind it. We think you can buy a little here, but be aware that any drop back below 50 (a failed breakout) would be reason to jump ship.
CSX Weekly Chart
CSX Daily Chart
Why the Strength
We’ve long believed there are too many banking companies in the U.S., so if the current credit crunch results in a few more mergers, that will be fine with us. And if the banks that disappear are bought by the likes of Hudson City, even better! This bank, which traces its New Jersey roots to 1868, has more than 100 branches in New Jersey, New York and Connecticut. It’s the largest savings bank headquartered in New Jersey and the third largest thrift in the United States. Forbes named it the “Best-Managed Bank of 2007,” and it was added to the S&P 500 on February 14, replacing American Power Conversion. What makes the bank remarkable in today’s environment is that it makes money the old-fashioned way, lending money for mortgages to people who can afford to repay as expected. It makes no subprime loans, and it doesn’t pool or resell its mortgages. As a result of this financial prudence, last September, Hudson was among the top three lenders, nationwide, for conservative mortgage underwriting standards. The amazing aspect of this fiscal restraint is that the bank is making money hand over fist! In the latest quarter, revenues grew 31% while earnings grew 23%. The bank’s dividend brings shareholders 2% annually.
HCBK came public in July 1999 and has been in an uptrend ever since, turning a $1000 investment into $19,000. Most recently, the stock retreated in January to touch its 200-day moving average at 14, rebounded to 16, where it built a base, and then–last week–zoomed up to 18. From here, a consolidation of this advance would be normal; we suggest buying on a pullback toward 16.
HCBK Weekly Chart
HCBK Daily Chart
Why the Strength
St. Joe owns more than 718,000 acres of land in Florida, mainly in the Panhandle. It gets some revenues from the production of pulpwood and timber, but mainly, it develops and sells towns and resorts, a business that’s been in the toilet over the past two years; check out the numbers in the table below. As recently as June 2005, the stock was owned by 167 mutual funds; at the end of 2007, that number was down to 110. So why the strength? In early March, the company sold 17 million shares of stock to the public and used the proceeds to pay off all its debt! That includes a $100 million term loan, $240 million in senior notes and the entire outstanding balance ($160 million) of its revolving credit facility. The result: Wall Street is very impressed. What impresses us, furthermore, is the fact that the company’s valuation remains rather high, a reflection of all those untapped acres. Carried on the books at roughly $1 billion, Wall Street is saying that when developed, they’re worth more than $4 billion. The big question is when positive momentum will return to the industry.
JOE was a fine investment through the 90s into 2005. But as the housing/credit crisis developed, the company’s shares fell from a high of 85 to a low of 27 in November, a drop of 68%. Since then, the stock has been driven higher by investors convinced first, that 27 was cheap, and second, that the company’s no-debt stance has eliminated credit risk. The uptrending 25-day moving average is at 40, a level that offers support dating back to January.
JOE Weekly Chart
JOE Daily Chart
Why the Strength
Kirby Corp., making its first Top Ten appearance, is technically in the marine transportation business, but its vessels confine themselves mostly to the inland waterways of the U.S. … the Mississippi River and the intracoastal waterways of the Gulf coast. The company’s fleet of tank barges and tow boats (plus a few dry-bulk carriers and tugboats) provide most of the revenue, with the remainder coming from a diesel engine maintenance business. Kirby’s record of growing earnings has been a model of consistency, with just one year in the last ten showing a decline in sales, and earnings rising for at least 15 consecutive quarters. This isn’t a huge growth story, but in troubled times, consistency can look very good. Kirby qualified for Top Ten on the strength of an optimistic outlook for first-quarter profits based on higher-than-expected demand.
KEX is what we call a tractor, a stock that shows consistent progress, but not a lot of speed. The stock doesn’t usually get far away from its upward trend line, and when it does, a correction or rally brings it back into line. The huge jump that followed the announcement of improved Q1 outlook brought KEX back near the top of its upward trading channel while scoring a new RP peak. Assuming that there will be some reversion to the mean, KEX should correct into the lower 50s, though it shouldn’t break below the 50 level if this upmove is for real.
KEX Weekly Chart
KEX Daily Chart
Why the Strength
Right up front, we’ll say that we are very impressed by MasterCard, both the company and the stock. Operationally, it’s important to realize that the company is not in the credit business. It doesn’t even issue credit cards. It “simply” maintains the network, establishes transaction rates, and advertises to keep the global brand well-respected and increasingly well-used. Judging by the numbers alone, it’s succeeding in a big way. Its revenue growth rate had been in the teens in recent years, but hit 22% last year. And its after-tax profit margin has averaged 19.8% in the past year; the 11.1% in the table below represents the fourth quarter, typically the company’s worst. We like the fact that MasterCard’s business is truly global. We like the industry’s high barriers to entry. And we like the fact that the stock is less than two years old and thus still under-owned; at the end of December, only 248 mutual funds were on board. (Parenthetically, we’ll say we’re watching the chart of recent IPO Visa (V) closely, as that has similar economics, but we need to see a little more chart action.)
This marks MA’s 11th appearance in Cabot Top Ten Report since the stock’s IPO in May 2006, but only its first of 2008. The reason for the drought: all year long it’s been marking time (not bad considering the action of the broad market). But today it broke out above resistance in the low 220s, and the odds are very good that 220 will now offer firm support, provided the broad market is healthy. We think you can buy a little here.